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News highlights for February 2013

PCAOB member Jay Hanson said that he struggles to see how the board
would ever be able to create a mandatory audit firm rotation
requirement for the U.S. public company auditors it regulates.

During a question-and-answer session at the AICPA Conference on
Current SEC and PCAOB Developments in Washington in early December,
Hanson said that many obstacles to mandatory audit firm rotation make
its implementation unlikely. “I can’t imagine that we’d go forward,”
he said.

In an interview after the Q&A session, Hanson elaborated on his
comments. He said that to create a mandatory rotation requirement that
would have a chance of being approved, the PCAOB would have to
consider statistical evidence that firm tenure is linked to audit
failures and deficiencies. The board also would have to complete an
analysis showing that the benefits of mandatory firm rotation would
outweigh the costs, he said.

“We’ve got all those things to do before we could meaningfully
propose or adopt mandatory firm rotation,” Hanson said. “I’m skeptical
as to whether we’d ever get there with all those hurdles in front of us.”

Hanson emphasized that the comments were his own and that he was not
speaking on behalf of the other four members of the PCAOB, which would
ultimately have to vote on the topic. His comments—and those of fellow
board members—suggest that the discussion is far from over. PCAOB
Chairman James Doty said at the conference that it is important to
examine ways to protect auditors’ independence, “including by
considering term limits.”

The PCAOB on Aug. 16, 2011, issued a concept release asking for
comments on whether mandatory audit firm rotation would improve
auditor independence, objectivity, and professional skepticism. The
release said that at the time, the average audit firm tenure for the
top 100 U.S. public companies was 28 years. The PCAOB was concerned
that auditors’ objectivity could be diminished if they were afraid
their work jeopardized those long-standing, lucrative relationships
between their firms and the companies they audit.

A few months later, the European Commission issued mandatory audit
firm recommendations that have been the subject of debate in the
European Parliament. The PCAOB has held numerous public hearings on
mandatory rotation where the board has heard many alternatives that
could improve objectivity and independence.

The AICPA has written a comment letter opposing mandatory audit firm
rotation, saying rotation would have costly and unintended
consequences and may hinder audit quality. (The letter is available at
tinyurl.com/cl45dnf.) The
PCAOB has received more than 650 letters on the subject; an Ernst
& Young study released in January 2012 showed that more than 90%
of the letters posted at that time opposed mandatory rotation.

During a hearing in March, some members of the U.S. House
Subcommittee on Capital Markets and Government Sponsored Enterprises
grilled Doty on audit firm rotation, saying the board needed to
consider the costs and benefits. Doty said the board would not
implement a mandatory audit firm rotation requirement without such a study.

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